DR-CAFTA Agreement and liberalization of trade in services: Evidence from Costa Rica

This paper analyzes the impact of the liberalization of services following the DR-CAFTA agreement in Costa Rica. The analysis is first performed using the Encuesta de Hogares de Propósitos Múltiples (EHPM) household survey to the changes in employment and wages by sectors (the revenue effect). In a second step, we use data from Encuesta Nacional de Ingresos y Gastos 2004 to analyze the partial equilibrium effect of possible changes in prices due to entering DR-CAFTA on household spending. The results show that the liberalization of trade in services in the framework of the DR-CAFTA agreement is successful in increasing welfare in Costa Rica. However, given the limited spending on these services by the poor, the total impact on poverty is small. The CGE analysis yield a positive impact on GDP following the reform. The total effect by 2030 is a 0.15% increase of GDP with respect to a scenario without service trade liberalization. Finally the reform benefit more to richer households with a significant budget share in financial services.